Top 3 Reasons: Why Most Traders Lose Money in Stock Markets

Stock market is simple game It goes up and it goes down so chances of winning or losing is always 50-50. So even if you flip a coin and trade basis heads or a tail you should be fine and in long run you will probably end up being at a breakeven point i.e. no profit no loss. But if this is the case then why more than 90% of traders lose money in this market? What makes it so bloody difficult to trade? If you ask me this question then I would say this is because of the following 3 mistakes which every trader MUST avoid. 

Mistake#1 : Tendency to book small profits but inability to take small losses: To me this is the single most factor causing most traders to bleed big time in stock markets. Whenever we enter into a trade we are quick to book profits. We buy Nifty at 10500 it rises 20-30 points immediately our palms start itching and we book profit. So no harm done, good we have booked profits. But what happens when we buy Nifty and it starts falling? We wait. It falls 100 points we wait a little more. It falls 200 points. We wait a little more then in the evening Dow falls 500 points and there is panic all around Nifty opens with another 100 point gap down next day and our loss is 300 points now margin call is getting triggered what we do? We have no option but to exit. So we did two trades, made a profit of 30 points in trade 1 and took a hit of 300 points in trade  2. How long do you think one can survive like this? We have a target for profits but no target for losses. If your upside target is 50 points then your SL should not be more than 30points. So in long run you should always be 20 points up ( even if you are wrong 50% of times). Idea is 'cut your losses short and let your profits run' but we end up doing opposite. We immediately book profit and wait for losses to mount till they become so huge that we are unable to bear them. Basically we do not exit loss making trade on our own we wait for markets to kick us out.

Mistake#2 : Not having a trading plan and trading basis gut/News based trading- We either do not have a trading plan or we keep changing it frequently. We give too much importance to news flow and social media and analysts saying Nifty has made a top or bottom. Dow rises 400 points  next day we think Nifty will follow suit so we buy Nifty and then feel surprised when Nifty end up closing negative. We then start blaming speculators and operators and say this whole market is fixed. My advise is never change your stance by a single set of data point. Data point will keep changing frequently but market trend will rarely do so. "RBI hikes interest rate" or " BJP loses state election" is no reason to go and short this market. The one thing about News is that its not exclusively available to you, everyone already knows about it yet we act as if someone whispered this only in our ears. Do not do that. If markets want to go up it will go up regardless of BJP win or lose RBI hikes or reduces interest rates or crude is at 140USD or 50 USD. Everything comes secondary. news flow or data points can impact market movements for intraday or for very short term but soon it will resume the main trend. So try to catch the main trend always, Do not be impacted by change in data points or negative news flow cause it just does not work. Be a leader not a follower.

Mistake #3: Expecting markets to follow you instead of following Markets (Quick to call out top and bottoms)- Most traders have very narrow view of Market and they will keep looking at market with their predefined mindset only. The problem with predefined mindset is that whenever we see a fall of 500-700 point we assume its a good time to buy and we are quick to jump on the idea that bottom is in place and its a good opportunity to buy. Similarly when a stock has had a good run up we tend to say " it has gone up a lot now it must fall so lets sell". Please understand there is a reason a particular stock has gone up or down and even if a stock has gone up100% there is no reason why it cant go another 300% up. We should never assume the top is in place or bottom is formed. Market is supreme and there is always a reason why it goes up and down and till the time you do not understand that reason do not take a bet against it. Its always safe to assume that main trend will continue ( instead of assuming that trend will reverse now). Let market decide when it wants to change trend and when it does you simply bow to it and move out, you do not fight. We keep fighting markets by taking contrarian view and assuming it will change its trend. Trends can run for days months or even years. Simply follow markets do not expect it to follow you. Markets are way much bigger that what you and I think. Give it the respect it deserves, do not fight it. Simply listen to what it says and follow no question asked. Period.

I can go on and on and list out 10 more reasons but the broad undertone of what mistakes majority of traders make is covered in these 3 points already. Its very difficult to master 100% of these traits and even experienced traders fail to do so but even if you manage to follow them 70-80%  of the times it will be good enough for you. The key here is that as soon as one realises that he is wrong then he should move out immediately. Its better to sit out with NIL position and letting go of some the probable profits then getting into a wrong trade and suffering losses. After all money saved is money earned.

Stock market trading is nothing but a mind game. You need to be mentally strong to survive here so keep your emotions aside, market has no regard for what you or I think it has a mind of its own. It teaches humility, the moment you think you have figured it out you will be proven wrong. Its like a test match where wicket is totally favoring bowlers and you are batting on 5th day. So face every ball as if its the1st ball you are facing, doesn't matter if you are batting on 100 or 200. Just like the game of cricket, complacency can be fatal in stock markets too.